US and China: Who will blink first?
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Hello and welcome to World Business Report here on the BBC World Service. I'm Rahul Tandon. Coming up, we're going to find out why there could be a toy shortage in the United States this Christmas. I know it's a long way away, but you'll guess the reason. It's tariffs once again. And there's concern for the survival of Africa's sheer nut tree, which provides an income for millions of women. China today is denying President Trump's claim...

We'll come to that story a little bit later. But we're going to start the programme once again by talking about China because...

China has told the Trump administration to scrap all unilateral tariffs if they want further trade talks. Let's get the thoughts of Yukon Wang, the Chinese-American economist. He was formerly the World Bank's country director for China. Thanks so much for joining us here on World Business Report. And I suppose that very strong stance that we've seen from the Chinese comes as no surprise to you. No, one should not be surprised. The Chinese government is both angry, angry because

Months ago, they approached the Trump administration to express their willingness to negotiate and talk about trade and got no response. They found it difficult to figure out what the Trump administration wants. And then when Trump applied unilateral tariffs up to 145 percent, this was seen from Beijing's end as an insult to the government. So they don't think that they can really negotiate with Trump because from Beijing's perspective,

The administration seems to change their requests and attitudes every single day. So what happens next here then? Because if they don't seem to want to talk to Donald Trump until he withdraws these unilateral tariffs, he doesn't seem like he's going to do that. Are we just stuck here? Both sides are digging in. So the question, as a speculation, who's going to cave in first? From China's perspective,

You would think that they are going to be under a great deal of pressure because the whole range of Beijing China's made products to the United States face a prohibitive tariff. And that will certainly have an impact upon production and employment. From the U.S. perspective, think about the following. A whole range of products, consumer goods, intermediate goods, from high electronics to textiles, furniture,

They're either going to be prohibitively expensive or not available in the U.S. There'll be inflationary pressures. Companies won't be able to find spare parts and inputs to continue manufacturing. There's the potential of a major recession. So the question is, who's going to blink first? In fact, both are going to suffer a lot.

They are. And China will suffer a lot in the short term, won't it? Because we were already hearing a lot of those factories that manufacture these goods for the US. We're going to hear from the toy industry in a few minutes time. They've stopped doing that now. So it's not as if there isn't going to be pain on both sides. But in the long term, who suffers more? Well, as you mentioned, the short term China suffers some 20 million Chinese employees per

depend upon exports and they may lose their jobs. But you have to remember, during the global financial crisis, some 100 or 200 million Chinese production workers actually lost their jobs. So 20 million actually is not that large. But from a U.S. perspective, politically, can the American public tolerate a dramatic increase in prices? Can they tolerate the fact that potentially everything from laptops to iPhones is

to toys, to medicine may either be much more expensive or not available. Politically, I think this is a big problem. China can control its population. It can stifle dissent. But in a U.S. democratic open society, I think this is actually going to be a big pressure point on the Trump administration.

You know China extremely well. One of the concerns that some economists have about the country is there's not enough consumption in it. Scott Besson, the US Treasury Secretary, has been alluding to that as well. Is that a fair criticism of China? Well, it's a complicated issue in the sense that China consumes about 50% of its GDP. And therefore people say it doesn't consume enough.

In the U.S., we consume 70% of our GDP, and the argument is that Chinese need to consume more. But the share of GDP that goes into consumption is not the real issue. The issue is how much is consumption increasing in both countries? Here in the United States, if consumption grows at, say, 1.5% to 2% a year, that's considered good progress. But consumption in China, even recently, has been growing about 5% to 6% a year, twice as much as the U.S.,

So the issue that you need to increase consumption in China needs to take into consideration. In fact, it's already actually growing quite rapidly. But the problem is that five years ago, it was growing at 8% or 9% a year, and now it's only growing at 5% or 6%. So the question is, should they actually try to support that, stimulate it? Well, if you do, it's a short-term solution. It doesn't solve the problem in the long term.

We are at a stage that we haven't seen for some time, haven't we, where we have two competing economic superpowers. So is it inevitable that even if one of the countries blinks first here, that the economic tensions are going to continue for some time? I mean, how do they resolve in the long term? Well, we have what we often say in political science or economics, the so-called prisoner's dilemma.

Two great powers. They're both attacking, retaliating against each other. They're both committed to their views. The consequence is they both are worse off in the long run. So how do you get out of this predicament? Because the two, the United States and China, they actually cannot solve this problem between the two of them. You need a third party. In the long term, my view is that third party's got to be Europe.

Europe has got to basically come into here, into this trade war, and basically lay out what they think are appropriate rules of conduct. If they don't, then I think this trade war between the U.S. and China will continue.

Listen, thank you so much for joining us on the programme. Really fascinating to get your thoughts. Look forward to speaking to you again. Let's bring in Kerry Leahy, economist, of course, at Columbia University. And it's a very confusing situation, isn't it? Donald Trump says, hey, talks are taking place through back channels. The Chinese say no. Who do we believe here, Kerry?

Well, my humble opinion, I guess I would believe the Chinese on this one, too. Trump may be saying that, but I don't think any of his minions are actually following up on it. So I think it changes from day to day. And the market likes the fact that Trump has started to blink and maybe he'll start blinking on China to roll back the tariffs to where they were in the month of March. And then they can actually have some real negotiations. Yeah.

Stay with us, Kerry, because I don't know if you've even thought about doing your Christmas shopping. We're months away from it, aren't we? But President Trump's move to slap imports from China with high tariffs once they reach U.S. stores threatens to disrupt the global toy market. China manufactures everything from Barbie dolls to Hot Wheels, car sets to jellycat stuffed toys. So what's going on? Gregor Hearn is the president of the American Toy Association.

77% of toys that are here sold in the U.S. are imported from China, so that's critically important for us for the short term. It has basically stopped production of toys in China. Toys are not only not being manufactured right now, but major retailers here in the U.S. have stopped buying toys locally.

that are imported from China for the same reason of not knowing what price those toys will be at. OK, that leads to a few questions. Let's talk about prices. Are we seeing prices going up yet or are people still relying on that inventory that they have? Yeah, the inventory is still there from prior to the tariff policy being put in place on April the 2nd. We think that if there are price increases, which we believe there will be, the back

to school time period, we believe is the first time that the US consumers are really going to see these price increases that have to come through. Just to be clear for our listeners, that back to school period, when is that? That would be consumers walking into the stores late July, early August, buying clothes and school supplies and other things for going back to school here in the US in late August and early September. So not that far to go. And it's

In terms of that figure you gave about earlier, 77% of toys coming in from the U.S., have we seen more toy manufacturing coming back to the U.S. in the last few years? Could that process speed up? Because that's what the president wants. There is toy manufacturing here in the U.S. We have major companies that have facilities in Pennsylvania, Texas, Massachusetts, Tennessee, all making big items like sandboxes or arts and crafts.

or very automated type products. Even one of the largest toy manufacturers in the world has plans for a new manufacturing facility in Virginia. So since the first Trump administration, manufacturing has grown here in the U.S.,

And in fact, in the conversations we've had with folks in D.C., we're committed as an industry to bring more manufacturing back here to the U.S., expanding where things are today and even have had small companies banding together to create coalitions to commit to having product made here in the U.S. So it's this balance of there is a very short-term, medium-term issue of there is no alternative because of how fast these tariffs came on of manufacturing.

Another alternative for China manufacturing or offshoring manufacturing today for holiday 2025 and probably holiday 2026. I know it seems a bit silly to ask about Christmas already because it seems to be a long way away. Not silly at all. Not silly at all. But...

Do you worry about Christmas this year? That actually there's not going to be enough toys. Prices are going to be really high. And how soon does this need to be sorted out to make sure that you have a normal toy Christmas?

Those that don't understand the toy industry think that toys are maybe made in September and October and are shipped over and then they're available on shelf for the holiday and nothing could be further from the truth. From toy manufacturers, Christmas is now. The toys that will be under a Christmas tree or for Hanukkah are made in April, May, June, and July. And

And we as an industry need to be at full capacity right now. No toys are being made. We don't want the American consumer and our leaders to be surprised when there is a toy shortage for holiday this year. And if this continues to go on for the next weeks, we're going to get to a point where it will be unrecoverable and there will absolutely be a toy shortage.

for holiday this season. What is the cutoff point for that? Are you saying if it's not resolved in a month, then there's going to be a toy shortage at Christmas? I think the simple way to think about it is if you've got four months of peak capacity production for every toy manufacturer that's supposed to be happening now, and we've lost the first month, we've probably lost a quarter of supply. Now, maybe we can catch up if something happens really soon. But if we go to another month,

I think we then are now talking we're going to be down half of supply.

And it's not a magical thing. You don't then all of a sudden just, if you've stopped production, snap your fingers and you're at full capacity, there's a whole ramp up process. I think there might be shipping challenges and capacity constraints there. So the entire supply chain is going to be under great pressure. But if we're not even making the toys, we may have a 50% shortage of toys and that will add to the pricing challenges. Greg Ahern there, Kerry Leahy still with us. Now, Kerry, I didn't...

You're probably going to go and buy some toys after this to make sure you have some for Christmas. But it shows you the supply chain problems that are in place at the moment.

Greg's story is very impressive in the planning that has to go on so early. And what he's really alluding to is the fact that across the toy business and just about every business, we're already in a planning recession, meaning the uncertainty of the future is making people sit on their hands and cut their plans. The question is, will that planning recession become a real recession?

And can you imagine a world that in three months from now, not only you're looking at bare shelves prior to Christmas, but also you could see some announced very unpopular cuts in programs such as Medicare and more likely in Medicaid as Congress is talking about those kind of cuts behind the scenes.

behind the scenes, but they could happen. So there's going to be a lot of blows to the average American come August when the back to school season of shopping starts. Yeah, well, Kerry, you're a brave man to predict what's going to happen in the next few months. We struggle to keep up with what's happening on a daily basis in the global economy at the moment because it is very volatile.

When you have bars in the sky, onboard showers and award-winning in-flight entertainment, it's no surprise that Emirates was recently named the best airline in the world. We fly you to over 140 destinations and with partners across the globe, we connect you to another 1,700 cities across six continents. So when we say we're also the largest international airline, what we really mean is...

If you're going there, so are we. Book now on Emirates.com. Fly Emirates. Fly better. Toyota is the best resale value brand for 2025, according to Kelly Blue Books, KBB.com. And with a wide range of dependable vehicles for any lifestyle, you can get everything you need in a vehicle today while investing in tomorrow. So choose Toyota and choose value. Shop by

Buy at Toyota.com for great deals and more. Vehicles projected resale value is specific to the 2025 model year. For more information, visit KelleyBlueBooksKBB.com. Kelley Blue Book is a registered trademark of Kelley Blue Book Co. Inc. Toyota, let's go places.

You're with World Business Report from the BBC World Service. Relations between India and Pakistan continue to deteriorate. This all comes after an attack on Tuesday when gunmen opened fire on a group of domestic tourists in Indian-administered Kashmir. 26 people were killed. India has named three suspects, two of whom are Pakistani citizens. Pakistan denies any involvement in the attacks. Today, the Indian Prime Minister Narendra Modi pledged to hunt down all those involved in the attack.

I say to the whole world, India will identify, train and punish every terrorist in their backyard. We will pursue them to the ends of the earth. India's spirit will never be broken by terrorism.

India has shut a key border with Pakistan and suspended an important and enduring water treaty with Pakistan, the Indus Water Treaty, that could have significant economic impacts. Pakistan has closed its airspace to all Indian airlines and suspended all trade with its neighbour. Pakistan's Defence Minister, Khwaja Asif, has been speaking to the BBC. We are just responding to what India has done in the last 24 hours, you know.

We cannot just take it lying down, you know. We have to respond in the same manner and in the same language, you know.

I hope not. But it looks like that this situation can escalate. There is a possibility of escalation also. So could that escalation be more economic than military? I've been speaking to Azair Yunus, principal of the Asia Group in Washington, D.C., and host of the Pakistanamy podcast. We discuss what economic impact Pakistan will face if India does suspend the water flow down the Indus.

The treaty and its revision is something India has been trying to pursue for a number of months now, and they've written to the Pakistanis about this in the recent past as well. I think the suspension itself in the immediate term doesn't do much in terms of real world consequences simply because it's not like you're turning off a tap and the water runs dry.

You have to build infrastructure and you have to make investments around the Indus River system and its tributaries that then reduces the flow of water into Pakistan. So, yes, in the medium term, it could lead to devastating consequences for Pakistan, given that it's a lower riparian country. But it's not like next month cities in Pakistan will go out of water simply because the treaty is under suspension. We've seen Pakistan suspend trade with India, but India,

that trade between the two countries is not huge. As both countries may look at what they can do economically to each other, there isn't that much, is there?

It's not a whole lot. And I think over the years that trade has declined, and particularly since 2019, I think the major impact, if anything at all, on this will be on border communities, and they will suffer. So ordinary citizens on both sides of the border will suffer. But goods that are in the market available for both countries, they will probably offset that quite easily because the quantum is not that large. So unfortunately, yes,

Trade and local communities will suffer as a result of these tensions. But it's not like it is going to cause a significant overall economic damage to either party here. Tell us more about those communities you're talking about on the borders. Is that on the Punjab side in particular?

It is on the Punjab side. And then also to a limited extent, it bleeds into other markets in Pakistan and India, but particularly centered around the Punjab. And you've seen, I think for now, Pakistan say that they want, for example, cancel visas of Sikh pilgrims. So that impact of tourism and the economy as it relates to the Kartarpur corridor will

continue. But then also Pakistan imports from India pharmaceutical products, at times sugar, etc. So our pharmaceutical industry, even in the past, had tried to argue with the government of Pakistan that these exemptions were important. So maybe we will see some consequences in the pharma supply chain. But by and large, yes, centered around the Punjab and local communities that trade across the Wagah-Tariq border.

These are two countries that afford a series of wars, haven't they, particularly over the issue of Kashmir. Some people think whether they'll use economic tools more, but from what you're saying, that's unlikely, isn't it? I think it's unlikely. And I think both sides since 2019, or even before that in the recent past, have tied themselves into this escalation and retaliation cycle.

So on the Indian side, post-surgical strikes, there is a clear demand among the Indian public and the Indian political elite that they have to respond through military and kinetic means. On the Pakistani side, the signal has been very clear that every time

a retaliation is due, they will not waver in that response. And you saw this not just with India, but early last year in 2024 with Iran as well, where Pakistan was very quick to respond to Iranian strikes on Pakistani soil. And I think part of the reason why Pakistan was quick at the time was because it wanted to send a signal to India as well.

So in this situation, both sides are boxed in. And I think Prime Minister Modi and his administration will have to respond in one way or the other. And Pakistan will have to have a calibrated response. Is there unis with those thoughts? Kerry, what we're seeing globally now, isn't it, though, even though in this case, it may not be as important as other factors, is that many countries are using their economic strength against other ones. In a sense, that's what Donald Trump's doing at the moment, isn't it?

Very true. I mean, you're having the big guy pushing around the little guy and you can criticize the Trump administration that they're having little people with very big jobs, but they are enjoying throwing their weight around. And this is another example of that on the on the subcontinent. And on that Trump side, do you think the fact that we have so many countries coming to negotiate is a sense that things are going well for him? What did the markets make of that?

Well, even though the market was up today, it was partly on the news that there might be some backing off on China. And also there was some pretty good tech news about data center favorable outlook. But I think people are kind of wondering where are they getting enough people to negotiate with 90 different countries? That's an extraordinary situation.

I'm just saying, where are they getting the employees since we have at least one agency cutting employees? So whoever's doing it, God bless them. Yeah, the USTR, the United States Trade Representative, doesn't seem to have a huge amount of people working for it. The trade war, which we heard there from Kerry, between China and the US is not the only tit-for-tat tariff battle, disrupting the flow of goods across borders and making commerce more difficult.

Tanzania has banned the entry of all agricultural imports from Malawi and South Africa, making business more difficult for those cross-border traders who spoke to the BBC.

There are about four cars which were stopped from entering Malawi and resulted into bananas going bad. They had to return them to Tanzania. The traders incurred big loss because most of them had borrowed the money to do the business. Our fellow trader has been arrested. She was stopped at the border.

I've been speaking to Sami Awami, who covered this story for the BBC from the Tanzania-Malawi border. The Tanzania Agriculture Minister said Tanzania is only responding to what the two countries have done. Malawi had imposed a ban on Tanzania agricultural produce for about a month now, and Tanzania had asked Malawi to lift that ban. It

It's given Malawi a few days to do that, but Malawi had not done that. And so yesterday, the minister said, because Malawi has not lifted that ban, we are obliged to do that.

And so Tanzania says we are only retaliating on what Malawi and South Africa has done to us. It's interesting, isn't it? Because there's been a lot of focus in Africa on the continent-wide freight trade area that's trying to come into place. This clearly shows it's not working. It is not. And many people have been pointing out to that exact point you're raising.

But even before, you know, we think about the continental level, Tanzania, Malawi and South Africa are in the same regional economic bloc known as SADC. You know, they're supposed to be trading more closely. But then every now and then you hear this kind of trade war between these two countries. I believe in 2023, if I'm not mistaken, there was another trade dispute between Tanzania and

and Malawi over maize from Tanzania and soy beans from Malawi. You went up to the border. You spoke to traders there about what was happening. What did they say to you? On the Tanzanian side, I was there. I spoke to truck drivers that I found there just, you know, sitting idle and other officials there. They told me on regular day they would have

a dozen of trucks, you know, bringing in or taking agricultural produce from Tanzania, taking to Malawi and from Malawi to Tanzania. But they said in the last few days, the trucks have stopped going to Malawi because of the ban. They're used to taking bananas and potatoes and tomatoes to Malawi. Now they're looking to take other

products, but they're not sure yet what that is. And that is a loss for them. I crossed over to the Malawian side and went to a town about 50 kilometers from the border. And I went to a market there. And there I found a lot of women, originally Malawians, mostly women doing business at the local market there. And they said they've been affected very much.

The market is very close to Tanzania. It makes business sense for them to come to Tanzania and buy product for them. And they say the Tanzanian products are much better, especially potatoes. They say they are much bigger and customers like that. So when they are forced to buy produce from their country, it doesn't make any business sense for them because they're losing customers. And some have even stopped doing business altogether because they are selling or they've been selling exactly the kind of produce.

that their government has banned from entering their country. So you very visibly there have described one of the problems with protectionism is

It seems to be a growing problem globally, also in East Africa. Do you think this is going to be resolved now or will we see these sort of things in place for some time? You know, it comes and goes every now and then. As we speak, just in March this year, Tanzania had another trade dispute with Kenya. Another fellow member in the East African community, these governments are struggling very much. They talk very happily about...

inter-regional trade. But when it comes to protecting their own farmers, their own producers, it becomes very difficult for them to balance these two

Swami Awami there, who has been to the Tanzania-Malawi border. Kerry Leahy, economist at Columbia University, is still with us. We know a lot of companies have been struggling in the current period, but Alphabet, one of the world's biggest companies, so important, isn't it, to the US economy, they've released their first quarter profits and up 46%, $34.54 billion. That's a pretty impressive performance.

Oh, absolutely. I mean, these companies can really generate a lot of revenue and profit. And you might argue that perhaps expectations are that they will continue to grow even faster than they're currently to justify their high share valuations. But it is another impressive sign about how they can really generate a lot of income. And with AI and perhaps unfounded space,

Yet spillovers from AI, they may continue to make even more money. So it's just impressive that every once in a while we like to dump on the Magnet of the Seven, but sometimes they do act magnificently. Yeah, they do. 30 seconds for you, Kerry. The key will be the second quarter because that is when we'll see the economic implications of some of the policies that Donald Trump's put in place.

Oh, absolutely. I think probably the most chilling number I've seen in the last month, and there have been a lot, is that in the fourth quarter, the typical CEO told his investing public, oh,

Only 3% of us are worried about a recession. Now 44% say they're worried about a recession. So will the planning recession become a real recession and that will be reflected in the second quarter numbers? And you're right, that's where the rubber meets the road. Well, Kerry, as always, thank you very much for joining us on the programme and guiding us through so many different stories. That is it for this edition of World Business Report.

When you have bars in the sky, onboard showers and award-winning in-flight entertainment, it's no surprise that Emirates was recently named the best airline in the world. We fly you to over 140 destinations, and with partners across the globe, we connect you to another 1,700 cities across six continents. So when we say we're also the largest international airline, what we really mean is...

If you're going there, so are we. Book now on Emirates.com. Fly Emirates. Fly better.